Reliance-Disney merger could lead to market share loss & challenges for other players: Karan Taurani

Reliance Industries Limited, Viacom 18 Media Private Limited, and The Walt Disney Company have announced the signing of binding definitive agreements to form a joint venture that will combine the businesses of Viacom18 and Star India. As part of the transaction, the media undertaking of Viacom18 will be merged into Star India Private Limited (SIPL). RIL has agreed to invest at closing INR 115bn (~USD 1.4bn) into the JV for its growth strategy. 

Karan Taurani, SVP- Research Analyst (Media, Consumer Discretionary and Internet), Elara Capital believes that the merger of Viacom18 and Star India will have a big impact on the entire M&E ecosystem as the combined entity will command a huge market share. 

In an analysis shared with the press, he said, "The merger will create a large media juggernaut with 108+ channels (Star India has 70+ TV channels in 8 languages whereas Viacom has 38 TV channels in 8 languages), two large OTT apps (Jio Cinema and Hotstar) and two film studios (one each of Reliance and Disney India). Large market opportunity (TAM) for the merged company, as India’s M&E market for print, TV and digital is at USD18bn in CY22, poised to post a CAGR of 8.2% over CY22-25 (Source: EY FICCI)."

The consolidation between RIL and Disney on the India TV side could hurt other linear TV broadcasters, such as Sun TV, Z Sony, and others, as they may not be scale up on market share, Taurani further explained. The merger also aims at dominating key markets, as both entities have a large customer base across various genres. This could potentially lead to market share loss and challenges for other players, including the possibility of smaller channels shutting down. 

Better prospects for profitability

Currently, both platforms are facing heavy losses due to high content costs, and Jio Cinema relies solely on AVOD without significant paid subscriber revenue. With the combination of Hotstar and JioCinema, the merged entity can enhance its subscription revenue by increasing subscription prices and attracting a larger subscriber base. Reliance may drive the entire business through Jio Platforms, with a significant influx of ad revenues in digital advertising. 

Taurani said, "The merger may result in improved profitability for the combined entity as there may be a reduction in employee cost, production cost and marketing costs on the TV side and content costs, particularly on the OTT side, which could contribute to a more sustainable path to profitability over the medium to long term."

On the sports front, the merged entity is set to become monopolistic, with Disney and Jio collectively controlling approximately ~75-80% of the Indian sports market across both linear TV and digital platforms. 

In digital, content cost inflation (content cost for web series 3-5x higher than for TV non-fiction shows, per episode) has been sharper due to heavy fragmentation in the OTT market and the entry of global giants with deep pockets. With the merger, content cost in digital may see much lower growth, which may improve the unit economics for the OTT business, potentially resulting in lower EBITDA losses for JioCinema and Hotstar.

Considering the critical role of technological advancements in the success of OTT platforms, the integration of Disney's technological expertise is expected to enhance the user experience on JioCinema. This improvement may subsequently drive higher subscriber numbers and revenue growth, Taurani added.

The ad revenue potential from IPL is expected to increase significantly with the merged entity having exclusive rights (TV+Digital) to IPL. This consolidation may result in bundled advertisement revenues, potentially mitigating the higher cost of IPL rights and reducing overall losses; due to IPL rights being split between TV and digital between two different platforms and the digital platform offering IPL free, there was a big dent in the IPL revenues on TV, which could see some respite.

Risks

Taurani listed down risks that this merger might bring:

• Since the merged entity will be the biggest player in the Indian TV industry, the merger will require CCI (Competition Commission of India) approval which may take some time or lead to a shutdown of channels in case of a big overlap (more within the GEC genre).
• Post CCI approval, NCLT (National Company Law Tribunal) approval may take another 8 to 12 months.
• A below-par customer experience on the video apps despite a wide variety of content may not augur well in subscribers paying for the same; global OTT giants like Netflix have a very superior experience to command a premium ARPU.
• Continuance of hefty losses of the merged entity over the near to medium term due to high costs sports properties (IPL, ICC tournaments & BCCI bilateral rights) could negatively impact valuation prospects for the merged entity.